Nvidia, Passive Investing and Your Investments | Weekly Market Recap

Unknown Speaker 0:00
Hello and welcome to Wealthion’s weekly market recap. I’m your host Andrew brill. Before we get started, I want to tell you about our upcoming conference in collaboration with SALT, Wealthion’s highly anticipated virtual conference will take place next Saturday, June 1. You can find all the details on our website at Wealthion.com. Now on to the recap this week on speak up Anthony Scaramucci spoke with Lynn Alden about the possibility of a looming financial crisis. You don’t want to miss this as Anthony roleplays and asks Lynn questions as chairman Jerome Powell.

Unknown Speaker 0:35
Want to do some play acting with you now? Okay, I’m the Federal Reserve Chairman. I’m drunk dialing at night, I’ve gotten your cell phone number from one of your friends. And I’ve reached you on the phone. And I’m a little concerned. So this is a drunk dial call to Lynn all then and I’m saying to her all the things that I can’t say in public, I’m saying

Unknown Speaker 0:56
the dollar has lost 25% of its value since January of 2020. I’m saying listen, I don’t know what these guys are doing in the Congress. But they’re spending like gangbusters six 7% deficit spending, we’re at full employment. I didn’t learn that in school, I certainly don’t think there’s a economist at the Fed that would like us to be doing this, we’re going to likely have an entitlement and social security crisis and a debt spiral. I’ve read broken money. And I’ve also read the book how money dies. And the only good news for us is that the other countries are probably in worse shape than we are. Our economy is probably stronger, but I’m really in a box. I don’t know what to do. And I don’t know what the policy moves are for myself. And I’ve got this blunt instrument known as jawboning and raising and lowering rates. But Lynne, be me for one day, and please tell me what you would do.

Unknown Speaker 1:51
Probably threaten to resign is the funny answer. But there’s actually some truth to it. So for example, during during the pandemic, Powell called for more stimulus, so we kind of crossed the line where normally monetary policymakers don’t, you know, as a general rule, they don’t really comment on fiscal policy, they tried to be not not kind of directly partisan. But he said, You know, we’ve used a lot of our tools, there needs to be some fiscal support. Right. So he crossed that line in that instance, what I would say now is that what we’re seeing on the other side of it, is that there’s this kind of overflowing amount of fiscal hitting the market. But he’s, he’s very reticent to comment on the fiscal side, because he kind of goes back to the position and not really seeing that his position. But I think at this point, a central banker, if they’re, if they’re trying to be kind of intellectually honest about this is time to say it’s hard to do any of my mandates, when deficits are this structurally big, because a central bank’s tools are primarily designed around accelerating bank lending, or decelerating bank lending. That’s really what they’re mostly geared toward. And we’re in a fiscal dominant environment now, meaning that ongoing, typical yearly fiscal deficits exceed the amount of new bank loan creation. And so those fiscal deficits are kind of a bigger impact on the economy in many ways, and those bank loans and they could they can drive things like inflation, they can drive things like nominal GDP running caught with some of the inflationary consequences that come from that. And basically, it’s saying, Look, I don’t really have the tools to deal with what’s happening there. And so if you want those mandates to be in any way, met, there has to be a fiscal response. And so right now, it’s kind of politically acceptable for central bankers, or Treasury officials to say, look, in the long run a time, yes, there’s a fiscal issue. But that, but then they always caveat by saying, you know, we still have plenty of room, no one’s gonna admit that, that the actual road is kind of running into issues under their watch. And I think that there needs to be more transparency around that issue. So I basically would say, Look, if you want me to be able to do my job, you need to you need to rein in yours a little bit. Otherwise, I would resign and say, Look, you put him in position where I can’t meet my mandate, because I don’t have the tools to meet my mandates.

Unknown Speaker 4:08
Okay, and so, you know, I’m a student of human nature. So we’re you these people don’t like doing that. Right. You know, they are. They say one thing, I don’t like Donald Trump, now we’re endorsing Donald Trump. Ted Cruz calls on the stippling liar. Now he’s like, for election fraud. So they do this stuff, so he’s not going to resign. So now we’re going to continue on our road of play acting, I am the campaign manager for either campaign. And the reason why it’s either campaign is they both have the same populist message on spending. Both campaigns say they’re not going to touch entitlements, not touching Medicare, Medicaid, or social security. But I’m drunk dialing you again. And I’m saying, you know, we’re gonna run the country off a cliff right? I’m going to do it, because I need to get elected and the people of the United States can handle the truth of what is actually happening here in the United States. But let’s say they could handle that.

Unknown Speaker 4:59
Truth, and I could possibly win the election with a truth telling message. What would you have me do?

Unknown Speaker 5:08
As our chief economist, if I was a true telling politician, and was about to run a truth telling campaign, what would the policies be? From my end? Well, it’s a good question. I mean, part of part of the reason I say nothing stops his train is because as you point out, the political incentives don’t align around, trying to control that. And he’s sort of like, a four year timeframe. I guess, if someone were really trying to stabilize this,

Unknown Speaker 5:34
it would start with changing the structure of spending around security, medicare and defense, you know, you kind of have to kind of go blank sheet of paper, do we need 800 foreign military bases? Is that keeping us safer? No. And what’s the cost of all that? Because that’s that kind of thing, then it’s like, okay, so we have systematically kind of made our food less healthy. And now it’s kind of ballooning into really high healthcare expenses on a per capita basis. If you look at Japan, I mean, they went through, they’re going through a significant aging problem, they’re much more aged than us. But they spent something like a third per capita on health care and get better outcomes. So clearly, we have a kind of a healthcare spending, right? Is that a polite way of saying that the Japanese are less fat than the Americans? Is that a polite way of saying it? Well, that is, that is a big contributor to it, it’s both, it’s both it’s eating habits, but it’s also we have a very processed food industry. So it’s not like, it’s not like one group, just their willpower gateway works over a short period of time, it’s the it’s the combination of human nature with this very processed,

Unknown Speaker 6:39
kind of background structure that makes it all the hard choices are just really, really easy to make. So it’s one it’s our food, both both individual decisions, food structure, the way we kind of structure healthcare payments, all of that results in basically just a completely ballooning health care expense, then you can do things like mean test Social Security, I mean, there’s ways you can, you can at least try to get that back somewhat on the track. But the problem is, the chance of any of this happening, especially all of it happening together is exceptionally low.

Unknown Speaker 7:07
And so I think that that’s, you know, structurally, it’s going to be very, very hard for any any politician even well, meaning ones to do that. And even if they get elected on that, probably as soon as they start enacting some of that they would not they would not win a second term, because they would not. Of course, they people don’t like to truth and they want to they want to they want you know, the Republicans that you’re seeing the Republicans are social conservatives, but they’re fiscal. They’re fiscally irresponsible. You know, both sides are fiscally responsible now, but they don’t care. They want the entitlements. The Tea Party 1012 years ago, there was placards saying, Get your government hands off our Medicare. And then people had to point out even though that’s a governmental program, you know, what do you what are you doing so, so they don’t care.

Unknown Speaker 7:54
Michael Green reveals the hidden economic dangers and the risks of passive investing in today’s market. And Vidya has yet again, crushed earnings. And Michael places the blame on the passive funds for the company’s soaring valuation. Here’s a segment from one of my favorite shows of the week.

Unknown Speaker 8:13
We continue to confront the dynamics of the growth of things like passive strategies, etc, that really don’t have a link to fundamentals other than the employment component. And that I think, is again, you know, going to be kind of the really interesting question, how do we see people start changing their portfolios, as they recognize that the tools that they’ve used that simply assume that equities deliver a certain return? Do they begin to wake up to the opportunity that at least I see within the fixed income space, where real yields are much higher than they’ve been in over a decade and the opportunity to take advantage of what the Fed itself will acknowledge or unsustainably high rates for a period of time? Does that begin to dominate portfolios? And in turn, how does that begin to change the financial market landscape? That’s, this becomes the key question. I don’t think we actually know the answer yet. What we do know is that the data is telling us the economy was weaker than the headlines would have suggested. My expectations are we’re going to continue to move in that direction. And we got housing numbers also had the housing sales were down. But I want to touch on something you mentioned, which was passive investing. And that you said that that artificially inflates the market, you explain to us what exactly passive investing is, and why it has that effect? Sure. So the language that refers to passive investing, people often confuse it with ETFs or with mutual funds, etc. It’s actually a very specific type of investing. It’s the type of investing that attempts to gain access to all securities in the market. A total market indices are kind of the best version of this. So something like a Vanguard Total market, or Blackrock total market, where you’ve taken stock selection or sector selection or security selection out of the mix, and you’re simply trying to match the overall market.

Unknown Speaker 10:00
position. That’s the theoretical framework for passive investing. And the idea is very straightforward. The average investor, the median investor, the vast majority of investors, for that matter, simply don’t have the time and resources to allocate to selecting securities and trying to beat the market. So you’re better served by simply participating. That sounds great. And it makes perfect sense in an environment in which transactions are largely frictionless. Unfortunately, that’s not how markets actually work. So the behavior from people buying those indices and buying those funds that are that are replicating these indices means that they’re actually influencing prices in markets. And as more and more people end up doing exactly that, and you’ll notice in that discussion, there’s no attempt at security selection, there’s no attempt at asset allocation, there’s simply an assertion, I want to buy it. All right. When you do that, you actually are changing the price behavior in the market, you are reinforcing price trends. So stocks that go up, suddenly get an incremental allocation of capital, and you Next put money to work that pushes them higher. This helps to explain the divergence that we’ve seen in the stock market where the largest stocks are getting larger and larger and more richly valued. Even as fundamental principles, like the law of large numbers suggests it becomes harder and harder for them to grow in the manner that they did historically. So if we’re talking about someone when we have employment or full employment as we’ve had for a period of time, and employers offer 401, K’s or IRA plans, and people say, okay, yeah, I want to participate. And they get they put in their money, they get their match from their employer, and just go someplace where they don’t. They just say, okay, yeah, put it in here. And that goes to a fund. That’s how that all happens. They’re actually not monitoring what they’re investing in. They’re just saying, okay, yeah, put it in this Vanguard fund, if you will, it’s up 567 percent a year, and the Vanguard fund just automatically pumps money into those stocks. Absolutely. And that’s it. I mean, that is the vast majority of investing, if you actually look at and quote unquote, investing really, it’s what people are trying to do is they’re charging, and I’ve heard others refer to it this way. And I think it’s fascinating. They think of the money that’s being put into a 401 K savings, right, almost like you’re putting it into a savings account. You don’t put any thought process really into the money that you put into a savings account, but you’re supposed to be you’re supposed to be thoughtful about the money that you put into an investment account.

Unknown Speaker 12:33
Again, the theory behind passive investing is that you are free riding on the efforts of others. And free riding in and of itself can actually be a very good thing. But you have to ask, what are the services that you’re providing on the other side of that? Why do you get away with that? The simple answer is by putting money to work in that fashion, you are actually providing a service to the market by increasing the liquidity. It makes it easier for me to sell if somebody shows up and says, Well, I have a job, I have savings, I’m just going to put it in, therefore I’m going to buy, you want to sell you may have some fundamental reason you want to sell I don’t care, I’m simply going to try to buy, right, that actually is an interesting service that you can provide to the market. But once you once those strategies become too large, they actually start to overwhelm the fundamental signals. And that’s really where we are in this process. So

Unknown Speaker 13:25
a lot of money be pumped being pumped in because we have or have had full employment. But as you said, at the top, unemployment is starting to move in the other direction. So what happens when those people lose those jobs? And that money isn’t being poured into those 401 k’s and the IRAs? Well, it also takes multiple forms, right? So remember that things like 401 K investing really didn’t exist prior to the 1970s. It was a program that was created in 1978. It was expanded in 1981. It was expanded again in a large scale fashion, in 2006, with what was called the Pension Protection Act that changed 401k is from entities that you had to choose to participate in, you received a job, the HR manager would say, hey, we offer a 401 K plan that allows tax deferred investing, would you like to have some of your money withheld from your paycheck in order to participate in 2006 that changed, so the vast majority of participants no longer are offered that option? They’re actually turned into what’s called an opt out framework as compared to an opt in framework. Instead of being asked Do you want to participate? You have to specify without being asked, I don’t want to participate. Alright, as a result, participation rose dramatically more funds were directed to the market. And we’ve continued to add to that dynamic buy in by creating incentives for employers to match funds that you contribute, etcetera. All these are good things in and of themselves. But they’ve dramatically increased the quantity of money that flows from things like 401 K’s

Unknown Speaker 15:00
and IRAs into the stock market. And then we went a step further, once you switch a system from being an opt in framework where I have to make a voluntary choice, and I have to select my own investments, to one that is an opt out framework where I’m defaulted into investments, you have to provide the employer with a legal shield that prevents them from you from suing them. When they make that selection, right? Did they behave appropriately with your money? The government solved that by creating what’s called a qualified default investment alternative. Those are all passive strategies. Now, it is required that they be the lowest cost index type products, the passive type products, in particular, people tend to be pushed into what are called target date funds. And this is very fundamentally and structurally changed the behavior in the market. So is it possible that

Unknown Speaker 15:57
since we’re at a point where this has become a problem, or could potentially be a problem, because if people are not

Unknown Speaker 16:06
working, and they’re not pumping that money in all of a sudden the signal goes, Okay, you know, what, I need some cash. And, you know, all of a sudden the market drops like a tank. Well, so that’s the key risk, right? And I just want to be very clear to people that my objective is not to turn around and try to scare people and say, Oh, my gosh, the markets gonna crash. Right? Right. But it is important for people to understand that there are a couple of features that play into the scenario that you talked about. So the first is when you think about passive investing, the theoretical definition of passive investing what’s actually underpinning it is a combination with called the efficient market hypothesis that the market ultimately will reflect all of the best ideas and information in its current incarnation at all points in time. If you believe that, then simply mirroring the market is effectively doing the best job possible, right.

Unknown Speaker 16:58
The second component is that you have to believe that the markets are capable of taking in new funds. And those funds come in or go out with very little impact on the market. And so just to specify this, the efficient market hypothesis, presumes that $1 into the market or $1, out of the market, changes the aggregate value of the market by about one penny. And you can understand why that happens, right? Because for every buyer, there’s a seller, theoretically, we meet relatively closely, right? It turns out, and this is where the academic literature is really beginning to explode. People forget, we didn’t really have the computational power, same way AI is beginning to emerge, we now actually have the ability to do research on transaction behavior, that allows us to test that theory in ways that we couldn’t have tested it before. When those were tested and put to the challenge in 2020 by two academics Viega Bay at Harvard University and Ralph co agent at the University of Chicago, they found out that the answer to $1 going into the market or coming out of the market was not a one penny increase. It was a five to $8 increase. Wow. Right. So 500 to 800 times misspecified, in the theoretical model that we’ve been operating under. Now, the reason that becomes an issue is exactly what you’re referring to. That means that the participation in the growing participation is had a much larger impact than we would have theoretically imagine this helps to explain why market valuations have risen so much as people have been pushed into these strategies. The second thing that then obviously raises your awareness of is the outsized impact when they start to withdraw. And there’s two reasons why they withdraw one you hit on job loss that requires you to tap into capital. The second reason, though, is simply retirement, and death and job loss come for all of us, it’s kind of easiest way to put it right. So we are going to see this impact, we are seeing this maturing system, the slows beginning of the flows beginning to slow, the job growth is now effectively stopped the rate of job growth that we saw in the US economy last year, as I pointed out was much lower than we thought it was a year to day basis, my expectation, my belief is that we’re actually quite close to zero net job growth.

Unknown Speaker 19:15
And if we go into a recession, we’ll see the job growth turned negative and people will lose their jobs. And that’ll happen at the exact same time that the baby boomers are beginning to accelerate into retirement and start to take distributions. So those are the things that I’m watching for and I’m very cognizant of, and to me, they represent risks that are obviously outsize because of my belief around how the system is working. Was there a you know, obviously, you know, one person isn’t going to make a difference, but is there a way for

Unknown Speaker 19:42
First of all, I guess my one of my questions is, can we change this? They obviously changed it so that there’s, you know, you can put your money in put say, Okay, I want to buy this fund, and, you know, just forget about it, because the historical increase in that fund is pretty good. How do we come

Unknown Speaker 19:59
that that, because it seems like when things are good, the economy is good people are working market just goes up because there’s that cash because of employment that’s being put in. But as soon as people lose their jobs, and as like you said the baby boomers retire and start withdrawing on that there would be an A market downturn. How do we fix that? So I think the unfortunate answer is there’s not much we can do, you’re certainly correct on an individual basis, the only thing that I can hope to accomplish is to educate people to make them aware, to encourage them to increase the quantity of savings that they’re allocating, both that they have, right because those historical return profiles that we use for our savings patterns, overstate the returns that we’re likely to generate in the future. And so the forward return profile looks less attractive than the historical return profile. Even as ironically, if the flows continue, the market can go up faster and faster. Right. So this is very much the chuck Prince line from 2007. You know, when the music’s playing, you got to keep dancing sort of thing, right.

Unknown Speaker 21:09
But people can be aware of that. And then the second thing that they can do is they can actually recognize the fact that the market is going to new all time highs is not an economic signal that tells you that growth is incredibly robust or that inflation is in a runaway construction. It simply tells you that this is how the allocation systems are built.

Unknown Speaker 21:31
On next week on the trading floor, Justin Nugent of market rebellion does a deep dive into Nvidia and predicts a stock split and appears Justin’s predictions were spot on once again, as Nvidia has announced a 10 for one stock split in their recent earnings report.

Unknown Speaker 21:48
Let’s get into our predictions from last week and pretty good. We had

Unknown Speaker 21:54
Citi Group, which did pretty well, I think that it was it was a it was a good bet, right there. Yeah, absolutely. And what we’re seeing in the options market, which is where we originally called out this moving city, which is up about a percent this week, right is that they’re rolling and staying with this trade, that means they’re going out to the next expiration, they’re staying on it. In some cases, they’re actually adding money to this trade, because they think it’s still going to keep going. So just in the unusual options, activity you saw in city, you saw that it started to go up, explain to us when you say you know they you can roll it or exit it. Explain to us what you mean by that. Yeah, Makkah rebellion, we really believe in keeping our discipline about us at all times. So when you start to see money growing in this trade, you have two choices, you can roll it in order to lock in some of that profit while remaining in that trade. And by the way, that’s what the smart money did. Or you can exit that and move on to the next trade. Now, as I said, what they’re doing here is that they are rolling this trade, that means they’re selling this option that we identified, and simultaneously buying another option at a later expiration at a higher strike at a cheaper price so that they can take the difference, put that in their pocket, and then keep some exposure on this trade in case it keeps going up. So let’s get into our next week. And we’re turning to AI for one of the winners for the week. Yeah, absolutely. So this is a bold bet. Right? I am making my winner for the week in video. Now. This is very binary. They report earnings next week. And we’ve seen a pretty fickle earnings season over this past quarter. All right, that means you can say, hey, I did great this past quarter. But you also need to say my guidance for next quarter. It’s better than you thought it was. I think despite the China headwinds that NVIDIA is going to do that and let me explain why. So SMH obviously, that’s the semiconductor ETF. They drove the market for a while at the start of March, they really got hit, they fell about 17%. from peak to trough. They stayed in a downtrend for about nine weeks. On the technical side, they broke out of that downtrend on May 6. And now they’re looking right in the face of those all time highs again, and no doubt in Vidya is controlling the car for whether or not we get there. Okay. Why do I think video is going to report solid earnings more than solid? Let’s start with the fact that four of the largest companies on the planet Apple, Microsoft, Mehta alphabet all come out this quarter and they say, we’re going to increase our spending on AI. And that’s not going to stop anytime soon. We’re actually doing that even more next quarter and the quarter after that, guess what, still increasing our spending on AI. You look around and you say who’s the beneficiary of that AI spending? Maybe it’ll be spread out across all the big AI chip companies. Here’s the thing. We’re starting

Unknown Speaker 25:00
To see some earnings from some of these AI chip companies, and we’re seeing AMD and we’re seeing Intel and we’re seeing some other companies, and some of them are doing good and some of them are doing bad but nobody’s coming out knocking it out of the park, right? AMD comes out and they say, We’re just okay. We’re not increasing our guidance in some crazy way. We’re not announcing a massive new orders. So who’s left at this stage? It’s in video. The creators of the most powerful chip on the planet, which is also incredibly expensive and so sought after that it’s actually sold out in several places, reportedly until 2025. Nvidia CEO Jensen Huang recently said, even if our competitors sold their chips for free, they would still be too expensive because our chips are that good. those are fighting words. All right. The elephant in the room here is that, you know, a lot of people hate to acknowledge this, but it’s very important from a trading perspective, which is the possibility that NVIDIA splits its stock, we know that this does not increase the intrinsic value of invidious stock. But in video has a history of rallying on these announcements and if it comes on the back of a very solid earnings, that could definitely mean something. Jensen Huang recently gave an interview back in March where he teased the concept saying he likes stock splits, that they’re good for employees that he wants to take care of those employees. You know who else stock splits are great for momentum traders. All right, I said the last time that invidious split stock, they rallied How much 35% from the announcement date to the split date. That’s a lot. The very last thing of note is that back in March, on the same day that NVIDIA got crushed, we identified a massive dip buyer dropping nearly a billion with a B dollars on Nvidia June expiring 820 strike call options. Now that’s, that’s a pretty short term bet, to bet a billion dollars on that’s, that’s a lot. Alright. Since then, with the downtrend in place, you might have thought they sold those they didn’t, they actually did what we talked about in city, they rolled about half of them up to the 880 strike, that means that they think that video is still going to go up and they left the remaining position down at the 820 strike, both are still worth hundreds of millions of dollars. And they added capital in that role. They added money they doubled down to this day, in all of invidious options chain. These are the highest open interest options that exist. So my winter is in video, and video right now trading over 900. So those those options look pretty good at this point.

Unknown Speaker 27:40
Chris Casey joined Wealthion to discuss The Shocking Truths About the Feds policy, and how they might be driving us towards recession. You might be shocked to hear that in March of 2020. The feds reserve requirements went from 10 to 0%. and remained there ever since.

Unknown Speaker 28:00
What are the tools that they have? We know that look, if they want to tighten economy, they raise interest rates, but what what are the tools? They look at so many different numbers Chris? CPI, PPI unemployment, and I know there’s like 100 of them that we never ever hear about that go into the mix that they look at on a monthly basis. I know they meet about eight times a year. But it seems like it’s almost monthly that we’re waiting, okay, here’s the news. What are we doing? What what are those things that go into? And what are the tools that they have to really dictate monetary policy. Ultimately, you could boil it down into really one tool, it’s the ability to increase the money supply or decreased by supply. Now, there’s a lot of different

Unknown Speaker 28:43
in their toolkit, a lot of different tools that will do that. So for instance, the three primary ones to influence the money supply, are open market operations, that’s where they’re literally going out and buying Treasury bills or Treasury bonds. They’re increasing supply of money by doing that, they’re buying an asset with money created out of thin air. That’s that’s tool number one to number number two, and probably the one that’s most frequently reported on and focused on, although it’s probably the weakest would be their ability to influence or set certain interest rates on the short end. So they set the federal funds rate they set the discount rate where they’re lending directly to banks, they the federal funds rate is the overnight rate essentially for banks to lend to themselves. That influences interest rates across the board to some degree. That’s tool number two. Tool number three is gone, actually, but tool number three, historically, was they were able to set the reserve requirements for banks that were on a fractional reserve banking system, unfortunately, which means that demand deposits are loaned out. So your checking deposits actually sitting there. It’s already been lent lent out and previously, the reserve requirement was 10%. So banks could lend out 90 cents on a dime

Unknown Speaker 29:59
dollar that you had given them in your checking account. Now, after March of 2020, it was like line item nine out of this huge memo they published at that time. So they tried to kind of hide it and diminish the importance they did away with it, there’s no 0% reserve requirement for banks, which means they grossly increased the money supply or had the ability for banks to increase the money supply at that point in time. And it’s no coincidence that 18 months later, inflation is at 9%. But those are the three primary tools that they use. And there’s a whole host of other things they can do, because they are in charge of regulating banks, so they could set banking regulations.

Unknown Speaker 30:40
A lot of it is just their influence. Like we talked about people paying attention to their speeches or minutes, what have you, they’re dot plots. So they’re, they’re constantly what what we call jawboning the financial industry as well trying to get what they want. So those reserve numbers that you talked about banks lending out more than more, or not having to keep any money basically in the bank. So you deposit whatever you deposit, they can lend out that money. It’s really what created some of the bank failures is that there was a run on those banks, people wanted their money, and they didn’t have the cash reserves to give it out. Isn’t that isn’t that right? Yeah. Well, fractional reserve banking is inherently I claim it was inherently fraudulent, but it’s also inherently unstable. And so you’re right, that is a big part of it. And then you compound that with the catalyst of rising interest rates, where banks were underwater with all their treasury holdings. And that’s ultimately what doomed a lot of banks in the spring of last year, let’s talk about the history a little bit and where rates have been. I mean, I went back to 1980. And the beginning of 1980, was 17%, in December of 80, was, you know, 19%, I bought my first house in 1990. Rates were just under eight. And then we endured a period. And yes, I’m looking at my list because I can’t remember all these rates, you know, there was a period from 95 to 2000, where it was in that file, right where we are now is in that five to 6% range. And then it started to really drop down where we had 0% interest rate for a pretty extended period of time. And now we’re back up to that 5% It seems that the low cycle was was lengthy, and the high cycle they’re trying to get back down five and a half percent interest rates, Chris, really not that big of a problem, is it? It is right now, it shouldn’t be to answer your question. It should not be by by any standards. However, it obviously is. Otherwise, we wouldn’t have had Silicon Valley Bank last year, we would have had these banking failures.

Unknown Speaker 32:42
And we’re not out of the woods in that regard, either. So they are normal rates. But when you have such malinvestment over the last 10 plus years because of low interest rates, right, where people were making economic decisions, investing in things they shouldn’t be investing in, that once you have recession, once you have higher rates, all those miscalculations that malinvestment is going to be revealed. And we go back to the Feds decision to you know, keep rates or how often they’re not correct. When you talk about recession, it doesn’t take much to really tip that scale. Right it you know, when they’re looking at it. And it’s strange. We never know if we’re in a recession until we’re out of it. Is the old saying and how to, is there any way to tell that we’re headed in the wrong direction? Well, I think there’s a lot of writing’s on the wall, whether you looking at the reduction of my supply, year over year growth, which has been negative for historically, unheard of levels and amount of time, if you look at the inverted yield curve, which I’m sure some of your guests have talked about. That’s very long in the tooth, as far as how long it’s been inverted, arguing for pretty large recession, or least economic weakness fairly soon. So there are some tools out there, the Federal Reserve has probably done over 500 PhD economists, you know, on staff. In fact, if you look at their minutes

Unknown Speaker 34:11
for the release after every FOMC meeting, it’s amazing how many people are in the room, so to speak, I don’t know what this room looks like. It must be a stadium. There’s like two pages of you know, prestigious sounding people in there. So they they monitor an awful lot of things. But ultimately, I think it comes down to what causes them recessions to begin with and that is artificially low rates because they’re propping up the money supply there, increase the money supply. And when you take that away when you take the Punchbowl away, interest rates rise, recession happens. Now investments are revealed.

Unknown Speaker 34:48
And last but not least, Brett Cadwell from eToro navigates us through market volatility, inflation and his investment strategies to help you protect your wealth.

Unknown Speaker 35:00
Given that the markets making new highs every day or every other day, what other noticeable trends are you seeing from your investor base? You know, I think the most surprising thing to me was to see. So every quarter we do what we call, retail investor beat survey. We call it rip for short, but to see just how much investors were broadening out their investments from just the typical tack is usually such a heavy investment and especially in mega cap tech, your apples, your Nvidia’s Amazon’s those sort of names and actually, when we did our rib survey, we found that financial services so banks essentially were

Unknown Speaker 35:45
the most popular asset among buyers which was that really surprised me I’m banks tend to be fairly boring and much less exciting than your Amazon’s in your in videos and whatnot. But yeah, we’ve seen a lot of action around AI, we’ve seen a lot of action and chips and, and banks, as I mentioned, but just in general a broadening out in in their investments, which seems to kind of fit the narrative we’re seeing in the market. It’s no longer just tech driving things. It’s a number of sectors really power in the markets right now. So let’s talk about the US consumer now and the health of the consumer. I recently had a discussion with Kyla Scanlon, she’s a young economist, and she coined a term called vibe session. Okay? And why that what she means is, even though the economy is still a very good

Unknown Speaker 36:34
people aren’t feeling that good. And I get when I read a lot of the commentary when I like, watch a lot of YouTube, that’s the sense I get, right, the US consumers not feeling good. And we recently saw numbers at a Starbucks, their global same store sales all across the US were down significantly, China, they were down significantly in those two markets represent 60% of their revenues. But what’s your feeling about the US consumer here? How do you think they feel, you know, I think the consumer feels a little bit tired. And depending on where they fall in the income bracket, they could be pretty resilient, or they could be very, very tired. Inflation has put the pinch on, I know, we usually focus on inflation from the perspective of the Fed and what they’re going to do and interest rates. But from a consumer standpoint,

Unknown Speaker 37:25
you know, inflation really pinches them by the time they pay their rent, their health care, their childcare, groceries, gas bills, I mean, they might not have anything left over at the end of the month, and they might even be in negative territory.

Unknown Speaker 37:40
You know, that’s a really draining feeling on somebody, emotionally and mentally. And it does drive this sense of, of being kind of fed up with it. And I think when you look at some of that, you mentioned Starbucks, and McDonald’s and few other companies. Some of those, I think, can be company specific issues, but largely, I think, we are seeing that, especially the low render the consumer feeling tapped out. And it’s just one more reason I think, why we need to see,

Unknown Speaker 38:07
we need to see more progress on inflation, if not, for the interest rates, that that’s kind of I don’t want to say secondary, but speaking largely for just the population in general, I think we need to see progress on inflation so that the consumer ends up being okay. You know, when we look at some of the recent data, if we, if we zoom out for the year to date, so

Unknown Speaker 38:28
the consumer has been pretty resilient. You mentioned labor market, the top of the show has been very strong unemployment rate has stayed below 4%. But when you look at some of the recent data, whether that’s you know, the recent retail sales print was below expectations, the prior month was revised lower consumer sentiment, the latest reading from consumer sentiment was weak jobs report missed expectations. So we’re starting to sort of see that

Unknown Speaker 38:54
tiredness from the consumer manifests itself in the actual hard data of the economy. And while some softness is okay, we do kind of need some of that to soften. But it’s, it’s a delicate balance, you know, we need that softness for inflation to come down. But at the same time, we don’t want it to get so weak that it starts to cause economic strain. And that’s, I think, sort of the fear in the back of investor’s mind and it should be the fear in the back of investor’s mind. Yes, and I think the commentary out of both Starbucks and McDonald’s was that the consumer is not spending like they used to. And so that’s really, I think that’s really interesting to see. We’ve also seen weak numbers coming out of lvhn and also the parent company of Gucci. So even at the high end, the consumer globally is not spending the money that they were just a year ago, inflation has a way of chiseling you down both in your in your wallet and and mentally you know, a certain point you get fed up by when you go to the pump your gas or you go into the grocery store and maybe put some stuff back on the shelf because the prices are just too high. So yeah, it’s definitely had a negative in

Unknown Speaker 40:00
PAC but the the hope is that we can come out on the other side of this without sacrificing too much of the labor market and too much of the economy. Okay, so one of the things that’s interesting about eToro is you cover both gold in Bitcoin, why don’t you give us your views on both of those assets? Well, gold has been doing really well and if you if you take a more zoomed out look on Bitcoin, it also has done really well it’s kind of lost a little bit of its luster some of its shine might have gone to gold over the last few months. But Bitcoin in general continues to do well. I mean, when we zoom out and look at the year to date and the 12 year or 12 month performance, it Quinn’s done really, really well. But it needs it needs a new catalyst and I think at the moment the idea of lower interest rates sometime this year is acting as that catalyst we saw Bitcoin rally I believe is over 7% Yesterday alone,

Unknown Speaker 40:57
far outpacing the s&p and, and the NASDAQ. So

Unknown Speaker 41:01
I think it still looks good to me, it seems like it’s just an sort of a holding pattern. Kind of looking for that either enough rest to resume the uptrend or waiting for that next catalyst to go higher. And so right now it’s just con consolidating what would be the catalyst that take it higher. Well, Bitcoin just had its its halving event, which has every four years and that’s typically a pretty pot, at least historically has been a very positive catalyst. And I think we might have seen a little bit of you know, investors are smart. So I think we think we’ve seen a little bit of a front run on that. Bitcoin rallied really hard into into the January ETF decision by the SEC, and then we saw a period where it cooled off, and then it broke back out again and it ran to new highs into the having event and now it’s cooled back off again. So to me the trend still looks okay especially when, like I said, when we zoom out to a larger time horizon, it still looks pretty constructive. But I don’t know when that next move comes higher, but consolidation is healthy. It does help provide the energy for the next move.

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